INTM441085 - Transfer Pricing: Transactions and Structures: Business structures

Pillar One of the Two Pillar Solution

In October 2021, members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) agreed a statement on a Two Pillar Solution to address the tax challenges arising from the digitalisation of the economy. This statement followed earlier work to address the challenges of the digital economy that had been published under Action 1 of the OECD/G20 BEPS Project in October 2015, which had considered the broader tax policy challenges raised by the digital economy and how to address them.

Pillar One of the Two Pillar Solution comprises Amounts A and B. Amount A seeks to adapt the international income tax system in light of new and increasingly digitalised business models around the world. Those business models can often lead to active participation in ‘market jurisdictions’ (broadly, those where the end consumer/user of a good or service is located) on an increasingly remote basis. In turn, Amount A seeks to provide those market jurisdictions with a new taxing right that they can exercise following a globally coordinated reallocation of taxing rights. The new taxing right would concern a defined portion of the residual profits of the largest and most profitable Multinational Enterprises. It corresponds with a newly defined nexus to those market jurisdictions and would be implemented by a Multilateral Convention. Amount B is a Transfer Pricing measure that provides a simplified and streamlined application of the arm’s length principle to in-country baseline marketing and distribution activities.  

Baseline Marketing and Distribution – The Simplified and Streamlined Approach

In February 2024, the OECD published The Pillar One - Amount B Report which incorporated an additional Annex to Chapter IV into the OECD Transfer Pricing Guidelines. This Annex contains guidance on an approach to simplify and streamline the application of the arm’s length principle to in-country baseline marketing and distribution activities featuring the wholesale distribution of tangible goods.

Under this Simplified and Streamlined Approach, in-scope transactions are priced using the Transactional Net Margin Method with a return-on-sales net profit indicator. A pricing matrix determines the return on sales for the tested party based on the following factors:

  • Industry grouping (based on products distributed)
  • Operating assets intensity (the ratio of net operating assets to net revenue)
  • Operating expense intensity (the ratio of operating expenses to net revenue)

The pricing matrix was developed using a global dataset of independent company comparables. Further details of the criteria and approach used to develop this global dataset can be found at Appendix A of the guidance on the Simplified and Streamlined Approach.

Importantly, the guidance on the Simplified and Streamlined Approach notes that although the measure draws from the general principles included in the remainder of the OECD Transfer Pricing Guidelines, it should not be regarded as a revision of those general principles, nor should it be used to interpret the application of the remainder of the OECD Transfer Pricing Guidelines with respect to any transaction.

The Simplified and Streamlined Approach as an optional approach

Jurisdictions can choose to apply the Simplified and Streamlined Approach to the qualifying transactions of in-scope tested parties in their jurisdiction for fiscal years commencing on or after 1 January 2025. Jurisdictions adopting it can either permit resident tested parties to elect to use it (a ‘safe harbour’ approach), or they can require tax returns to be filed on the basis of the Simplified and Streamlined Approach where the scoping criteria are met (a ‘mandatory’ approach).

The guidance notes that in jurisdictions that choose to apply the Simplified and Streamlined Approach, it will be treated as providing an arm’s length outcome, whereas in jurisdictions that do not choose to apply it, it cannot be relied upon to provide an arm’s length outcome. Subsequently, both the guidance and the Introduction to the Pillar One - Amount B Report provide important clarification of the treatment of the Simplified and Streamlined Approach, and its outcomes, in a variety of circumstances including the following:

  • Firstly, subject to their domestic legislations and administrative practices, members of the Inclusive Framework (including the UK) have committed to respect the outcome determined under the Simplified and Streamlined Approach to in-scope transactions where such approach is applied by a 'covered jurisdiction' and to take all reasonable steps to relieve potential double taxation that may arise from the application of the Simplified and Streamlined Approach by a covered jurisdiction where there is a bilateral tax treaty in effect between the relevant jurisdictions. The OECD have published a Model Competent Authority Agreement that jurisdictions can use to implement this commitment where there is a tax treaty in place. This document provides a template agreement text that Competent Authorities can use to confirm their intention to resolve a mutual agreement procedure case involving an in-scope transaction by applying the Simplified and Streamlined Approach.
  • Secondly, in circumstances where the tested-party and counterparty jurisdiction both elect to apply the Simplified and Streamlined Approach, they are each expected to accept the outcome resulting from its application to an in-scope transaction and, where necessary, provide reciprocal corresponding adjustments or recognise that outcome within the framework of a Mutual Agreement Procedure.
  • Lastly, in situations other than the above, where one or more of the jurisdictions relevant to the transaction has not chosen to apply or accept the Simplified and Streamlined Approach, then in any resultant Mutual Agreement Procedure, the competent authorities of both jurisdictions must justify their positions based only on the remainder of the OECD Transfer Pricing Guidelines. The Simplified and Streamlined Approach must not be considered or referenced by those competent authorities as an approach which is treated as leading to an acceptable outcome.

A list of jurisdictions applying the Simplified and Streamlined Approach will be published on the OECD website. Further guidance will be added to this manual if the UK adopts the Simplified and Streamlined Approach. Case teams with any queries regarding this approach can contact the BAI Transfer Pricing Team.